SPACKMAN Entertainment Group' s proposed divestment of an associate for at least S$32 million has raised concerns as the transaction appears to be at a considerable loss, and the buyer would become a subsidiary of the Catalist-listed firm after the deal.

 

This more so as Spackman Entertainment had acquired the associate Spackman Media Group Limited at a significant premium to net tangible assets (NTA) merely two years ago.

 

In his blog over the weekend, corporate governance advocate Mak Yuen Teen questioned why Spackman Entertainment would propose such a low selling price for its stake in Spackman Media.

 

He noted that Spackman Entertainment had acquired a 27.4 per cent interest in Spackman Media in a share swop at a price of about S$0.60 a share.

 

Furthermore, the Singapore-listed Korean entertainment group had also raised its stake in Spackman Media in 2017 and 2018 at US$3 a share, or US$19.4 million in total.

 

Doubts arose after Spackman Entertainment announced last week that it has inked a non-binding memorandum of understanding with Spackman Equities Group to sell its entire 43.88 per cent stake in Spackman Media for at least 2,000 won (S$2.30) a share or 27.9 billion won in total. The parties have not agreed on the price yet.

 

In exchange, the Canada-listed Spackman Equities will offer newly-issued ordinary shares to Spackman Entertainment, thereby becoming a subsidiary of the latter if the transaction materialises.

 

Spackman Entertainment, in its response to queries from the Singapore Exchange (SGX), had explained last Friday that the value of the Spackman Media shares has declined " due to unexpected economic conditions" , including the prolonged ban by China on South Korean entertainment and the outbreak of the novel coronavirus.

 

But Prof Mak seems unconvinced. He pointed out that when Spackman Entertainment acquired the stakes in Spackman Media at US$3 a share, the ban had already been in place for over a year.

 

The academic also cited the response given by Spackman Entertainment to the SGX in 2018, that the geopolitical issues between South Korea and China had allowed the group to up its stake in Spackman Media at attractive valuations.

 

From this, one could infer that the US$3 a share price tag was a good price.

 

There are other concerns, such as the rationale in making the financially-strapped Spackman Equities a subsidiary of Spackman Entertainment, if the divestment were to go through.

 

Spackman Equities is said to be planning to engage in the development, production and financing of Hollywood film investments and expand the talent representation business into North America.

 

Casting doubts over Spackman Equities' financial ability to do so, Prof Mak noted that Spackman Equities' financials have been " abysmal" , especially in the last three years as the company has racked up losses, and also reported a loss of C$1 million (S$1.04 million) for the quarter ended March 31.

 

In addition, the company had only about C$77,000 in cash and had negative retained earnings of C$12.1 million.

 

Prof Mak also sees possible difficulties in checking the independence of shareholders who would vote on the proposed divestment as an interested personal transaction.

 

This is because Spackman Entertainment has made a few share swops and share placements but some of the parties were not identified on the ground of confidentiality.

 

Therefore, he urged SGX to ensure that Spackman Entertainment' s proposed divestment is voted on by shareholders who are truly independent, and that the transaction would be reviewed robustly including performing proper due diligence on Spackman Equities.

 

Spackman Entertainment, in its regulatory response on Aug 21, said bringing Spackman Equities into its fold will help bring about more opportunities for Spackman Entertainment to shift its business model towards producing US Hollywood films.

 

Also, the firm can continue to tap on the " synergistic" value of Spackman Media, which is collectively one of the largest entertainment talent agencies in South Korea in terms of the number of artists under management, said Spackman Entertainment.

 

The Business Times has reached out to SGX and Spackman Entertainment' s sponsor RHT Capital on whether the proposed divestment is considered an interested person transaction and what would be done to ensure shareholders who vote on the deal are indeed independent.

 

Spackman Entertainment shares ended unchanged at 0.8 Singapore cent last Friday.